Foros de la Plataforma por una Vivienda Digna

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Focus on Spain: When building stops stone dead

On a narrow street in Madrid’s Bohemian Chueca district, there is a smart, renovated apartment block that should be teeming with trendy young urbanites. At the peak of Spain’s property boom between 2005 and 2006, similar properties were being sold off-plan to first homebuyers and speculators, the latter of which would flip them for quick profit.

However, the block is largely empty, its entrance papered with “To Let” and “For Sale” notices. Two large developers’ banners hang from the building’s shuttered balconies, more than a year after the renovation was completed.

As many feared, Spain’s real estate boom turned out to be a bubble, inflated by easy credit. The idea that demand for new homes by immigrants, young couples and European retirees and holidaymakers would never fade was an illusion.

With financing now tight, Europe in recession and unemployment in Spain at 15 per cent and rising Spain’s massive residential overhang has come into sharp relief. On city outskirts and along coastal resorts, rows of new-build houses and villas stand empty, while half-built estates lie abandoned, their developers in the bankruptcy courts or negotiating debt or asset swaps with creditor banks. The cranes that once dominated city and beachside skylines have all but disappeared.

“It turns out that the Spanish economic miracle was a mirage,” wrote economists Manuel Arellano and Samuel Bentolila in the El Pais newspaper, “because we devoted ourselves to building houses that we would never have built had we known what they would be worth in the future”.

Most estimates suggest there are at least 1m unsold new homes in the country. Building has stopped dead: last December, there were no housing starts by members of so-called “G14”, a lobby composed of the country’s biggest developers. It predicts a maximum 150,000 starts this year compared with about 700,000 at the peak of activity.

Meanwhile, the number of home loans awarded in 2008 shrank 32 per cent year on year, its biggest annual fall in 16 years. In the past 12 months alone, the country’s three biggest property developers – Martinsa-Fadesa, Colonial and Metrovacesa – have either entered administration or been taken over by banks.

Partly as a result of this, Spain’s main savings and commercial banks have between €40bn and €50bn of property under direct control, either on the balance sheet, in special joint ventures or in property funds that are being liquidated or bought out. BBVA, Spain’s second-biggest lender, last November opted to reimburse panicked investors in its main property fund in a move that cost it €1.6bn. Santander, its biggest rival, took the other route, recently freezing payouts from its €3.2bn Banif Inmobiliario fund after investors rushed to withdraw about 80 per cent of its value at once. Both banks are hoping for an “orderly sale of the assets”, according to Eduardo Martínez, professor of financial management at the IESE business school. “Banks are in the process of setting up in-house property offices,” he says. Large real estate agents have adapted to the times, advising smaller lenders on property management and sales, or helping the larger banks place stock or find tenants. “These days we work exclusively with the banks,” says Alberto Prieto, a partner at Knight Frank’s Madrid office. “They are the new client market.”

Commercial property specialist Cushman & Wakefield, too, has just set announced a pan-European joint venture with Investment Capital, the UK financier, to advise banks on their growing real estate portfolios.

Amid all this jostling for new business, however, actual sales activity continues to slow: total sales of new and used homes last December were 26 per cent down on the same period of 2007. Knight Frank estimates that it will be four or five years before the residential market shows signs of recovery, after a price correction of at least 30 per cent.

The downturn has also spread to the commercial property sector. The value of office block deals in Madrid and Barcelona slumped 74 per cent and 61 per cent respectively last year, compared with 2007, as volumes and prices shrank, according to real estate agents Aguirre Newman.

As recession bites and companies downsize, commercial property values will continue to fall. Some say Spanish prices, long considered unjustifiably high, are due for a 50 per cent correction. Most large-scale commercial developments have been shelved until further notice.

For some of the banks sitting on bulging real estate portfolios, the slump could prove disastrous, as write-downs on the value of property eat up precious capital at a time when funding remains scarce or expensive. Large, geographically diversified lenders such as BBVA and Santander are strong enough to tough it out, say most observers. At the weaker cajas and small banks, however, consolidation looks inevitable.

http://www.ft.com/cms/s/0/f2449a82-0a7b-11de-95ed-0000779fd2ac.html?nclick_check=1